The Federal Housing Administration will sell more defaulted mortgages than it first anticipated in a program to cut losses on mounting foreclosures across the country, Carol Galante, acting FHA commissioner, said today.
The government mortgage insurer will auction approximately 9,000 discounted loans in the September start of the program, including 3,500 earmarked for neighborhood development programs in four major metropolitan areas. FHA estimated it would sell 5,000 delinquent loans every quarter when it announced the program in June.
“It’s a little bit of chicken and egg,” Galante said in a conference call with reporters. “Once we decided to do this on a quarterly basis, on a larger scale than we had previously, that generates interest both for the existing servicers who are needing to cooperate with a loan-sale program, as well as interest from buyers of these loans.”
The effort, which began with a pilot program in 2010, offers discounts to investors of as much as 65 percent off the unpaid balance. Buyers of the loans are encouraged to write them down in an effort to keep borrowers in their homes.
The program may also help the FHA reduce its liability from defaulted loans, according to Isaac Boltansky, vice president for research at Compass Point Research & Trading LLC in Washington. “What we’re seeing at the FHA is a government agency that has a precarious capital position who is taking steps to improve that as much as possible,” he said in a phone interview.
Investors, who can apply to qualify as an eligible bidder beginning today, must agree not to foreclose on borrowers within the first six months of purchase while they work to modify the terms of the loan. No more than half the loans sold can end in foreclosure under the terms of the auction.
Loans on properties in Chicago, Phoenix, Tampa, Florida and Newark, New Jersey will be sold to investors expressly committed to neighborhood stabilization. Those cities, in which mortgage pools range from approximately 300 loans in Phoenix to 1,500 in Chicago, were chosen to represent a range of market conditions, Galante said.
The 5,000 loans not designated for neighborhood stabilization will be divided into smaller pools whose sizes have not yet been determined, according to Galante.
Bidders on neighborhood stabilization loan pools must demonstrate experience in property management and helping borrowers, Galante said. They must commit to community development through means such as modifying mortgages, leasing to current homeowners, or selling or donating discounted loans to an FHA grantee.
“Explicit emphasis will also be placed on state and local governments as well as non-profit and community-based entities as part of the bidding process,” Galante said.
The FHA sold 2,100 discounted loans through its pilot program beginning in 2010. Most of the notes remained delinquent a year later, according to agency data.
The agency does not yet have enough specific long-term data from the pilot program to predict outcomes for the program, Galante said.
The FHA calculates that the amount it will recoup from loan sales is greater than the amount it would lose if the properties were foreclosed on and put on the market. The agency currently owns 40,441 foreclosed properties, which each cost an average of $30 a day to maintain and market, according to FHA deputy press secretary Tiffany Thomas Smith.
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